How to cash in on exchange controls, the ailing rand and high interest rates
Defensive and currency hedge stocks are widely favoured, reports TERRY BETTY
Now that the lifting of exchange controls appears to have been put on the backburner for anything up to five years, it makes sense to restructure your investments accordingly.
Rudolph Gouws of Rand Merchant Bank and Azar Jammine of Econometrix give the following projections of the investment environment for the next year or so:
Had exchange controls been abolished in one swoop, a sharper rise in interest rates and a steeper decline in equities could have been expected in the short term, say the analysts.
Given these predictions, where is the best place to invest your savings? Certainly not under the mattress: the falling rand will push up inflation, thereby decreasing the value of your nest egg.
High real interest rates make bank deposits and government bonds attractive.
Andrew Bradley of Fincorp suggests that you lock yourself into a fixed deposit only after the interest rate rises by the additional 1% that the experts have predicted.
Income unit trusts that are highly liquid , such as those of Old Mutual, Rand Merchant Bank, Sage and Standard Bank, are another attractive alternative because of the high interest rates. Bradley says you should not buy long-dated bonds because interest rates are expected to start falling from the middle of next year.
He says as individual investors get taxed on interest earnings, a 16% deposit rate translates into an after-tax return of closer to 9%.
"Therefore equities remain attractive - you can achieve a better return on the stock market if you select your shares carefully.
He adds: "Now is the time to go into defensive stocks, such as the financial services sector and rand hedge shares, which tend to perform well in times such as the present."
Rand hedge shares are still a good bet, even though the rand is considered to have stabilised. Stocks to avoid during the forecasted economic downturn include cyclical equities such as Iscor, Sappi and other commodity shares.
Bradley warns investors against trying to time the market by selling all their shares and investing everything in interest-bearing investments, and vice versa when the market turns around.
"There is no point in trying to time the market because statistics show that you have to get it right more than 70% of the time in order to beat market performance."
He says a far better bet would be to lighten the load in equities from around 75% to 60% of your portfolio.
He says having 40% of your portfolio in cash and 60% in defensive stocks is conservative and will show benefits whatever happens.
"You benefit from high interest rates with your 40% cash holding.
"If there is a downturn in the stock market then your defensive stocks will hold their own. Your rand hedge shares will perform if the rand takes a tumble, and your total equity portfolio will benefit when the market turns around."
Most people do not have the cash or know-how to invest directly in the stock market, but participate through unit trusts.
Bradley says the way to select a unit trust is to find one whose investment policies match your own.
He says funds whose policies tie in with the above include Coronation High Growth and BOE Growth Fund.
For a rand hedge component you could invest in an international fund such as Investec Worldwide Fund, Sanlam Optirand and Old Mutual Global Equity. And for an investment in defensive stocks such as banks and insurance companies you could consider Sage Financial Services Fund.
However it is expensive to switch unit trusts.
Bradley says if you think that the cost of switching funds outweigh the benefits, then you could leave your existing cash in the fund and move all future contributions to the unit trust of your choice.